3 considerations for investing in a bull market

This summer, we are seeing a green wave in markets despite a recent bout of political volatility. The S&P 500 has returned more than 6% since the end of May and has made almost 40 all-time highs this year. So why are the bulls having their time in the sun?

To start, inflation is no longer threatening. Last week’s U.S. CPI report showed that headline inflation was negative in June for the first time since May 2020 (meaning prices actually decreased). Even some of the stickiest items such as shelter costs finally slowed. Meanwhile, growth has cooled (but is not cold), and the labor market has normalized. That follows a string of softer inflation prints across the developed world – setting the scene for more central banks to join the rate cut party in the second half of the year.

We understand that it can feel difficult to get invested or stick to your plan when equity markets are rallying fast. In this week’s note, we take three lessons from our analysis that help us embrace the rally.

3 considerations for investing in this bull market

1. This rally is justified. Here’s why:

• Innovation is driving profits. It should no longer be a surprise to investors that the rise of AI has been a primary contributor to market performance. While the first leg of the AI rally has involved mostly hyperscalers (AMZN, META, MSFT, GOOGL) and semiconductor manufacturers (NVDA), an increasing number of other AI winners are emerging. Companies dedicated to the infrastructure buildout, such as data center REITs, energy storage and electrification, have posted an impressive average return of almost 30% year-to-date. Look no further than materials technology company Corning. Last week, their earnings beat investor expectations, with demand for generative AI products cited as a key driver. The stock is now up almost 50% this year. The momentum seems real. Given that less than 5% of U.S. companies are actively using AI (according to Census Bureau data), the runway could last for years to come.
• Cuts are coming home. Football might not have come home, but interest rate cuts do look to be on the way. That process is already under way in some places like Europe and Switzerland. In the U.S., between last week’s CPI data and Chair Powell’s congressional testimony, it seems like the Fed is finally ready to join the global easing cycle. For the UK, inflation has already fallen to 2% (albeit with some stickiness under the hood) and the Bank of England has signalled its intent to reduce policy restrictiveness. On the whole, the orderly normalization of inflation and growth globally supports the idea that a gradual cutting cycle isn’t too far away. This should be good for stocks. Since 1985, five of the best 10 years for the S&P 500 came when the Fed lowered rates outside of a recession.

The most pertinent historical analog to the current environment might be 1995. Then, the Fed achieved a soft landing just as the market was beginning to appreciate the new wave of excitement around the personal computer and the internet (Netscape IPO’d in August 1995).

2. Bull markets can last for a long time. The median bull market lasts 46 months (about three times longer than the average bear market). The S&P 500’s current bull run is only 21 months old. Time is one thing; returns are another. The median bull market total return is 110%. The current bull market total return is only 50% as of the end of June.

If this bull market merely matches the median, it could last another two years with the potential for an additional ~60% cumulative return. Given the strength of the market over the last nine months, we aren’t surprised that some investors are feeling “rally fatigue” or think the market is due for a correction. But history indicates that time is on the bull’s side.

3. S&P 10,000? Could be sooner than you think. Trends such as equity returns are not a good reason to sit on the sideline. Our 2024 J.P. Morgan Asset Management Long-Term Capital Market Assumptions project a 7% return for large-cap stocks over the next 10–15 years. While that may seem like a far cry from the 28% total returns we have seen over the last year, a 7% annual return would imply that the S&P 500 will hit the 10,000 mark in less than a decade (we are trading around 5,600 today).

Don’t let all-time highs get in the way either. The market has made an all-time high in one out of four trading sessions this year. While some investors are reticent to “buy high,” the data suggests that investing at highs has not notably impacted returns. Actually, over the last 50 years, investors were better off getting invested at an all-time high than they were on any other day.

While there could be volatility on the road ahead, history proves to investors the importance of staying invested. A globally diversified portfolio should act as the core, with other opportunities helping to grow and preserve wealth across a range of outcomes. For example, equity markets outside the U.S. have not run quite as hard and fast – that creates a wider-than-usual valuation discount in Europe. Meanwhile, pockets of real asset markets (like infrastructure and commodities) should act as a ballast in the event that disinflation progress stalls or reverses.

Your J.P. Morgan team is here to help.